Bangkok--8 Oct--HSBC Thailand
Asian equities will struggle as long as there are no signs of a recovery in earnings growth in China
However, low valuations make us favour China over India, a market where consensus remains overweight. We see some value emerging in ASEAN
We use themes less sensitive to macro factors to select "Best in Class" companies to build equity portfolios
While the debate about the timing of US interest rate increases continues, we think nervousness surrounding the RMB is a bigger risk for Asian equities. It means that a new transmission mechanism has now been established between future volatility in the Chinese economy and Asian equities; PEs need to fall to price in this eventuality. This, together with the absence of clear signs of a recovery in Chinese growth, means that Asian equities continue to struggle.
China is now more defensive than India. Given low valuations, especially in China, there is an upside risk that signs of stabilization in growth in China could lead to a sharp reversal in fortunes, particularly if Beijing's policy response shows more urgency in the coming quarters. Our message is simple - don't ignore Chinese equities. India is where growth is likely to be the highest in Asia in 2015. But earnings growth expectations are on the decline, and rates have already been cut. The reality of India's federal system and the power this gives to the states means that the pace of reform is slow. Equity valuations are high, and we are reluctant to pay any premium linked to reform. However, consensus remains firmly overweight India. We wonder how long this might last.
Value elsewhere. In North Asia, we prefer Taiwan to Korea for two reasons: (1) Taiwan's tech companies offer better growth prospects; and (2) Taiwan trades at a deeper discount, offering better relative value than Korea. In ASEAN, valuations are low and earnings downgrades are starting to bottom but currency weakness remains a key risk.
What to buy in a sell-off? Given this difficult environment, we stick to our focus on "Asia Best in Class" companies that have what it takes, in our view, to generate sustainable high returns over the medium term. We also focus on themes that can play out slowly over the long run. Examples include new energy, industry changes, financial inclusion and lower interest rates. How these themes can be linked to individual stocks and a portfolio is presented in Asia Super Ten: An equity portfolio reflecting our best ideas in Asia, also published today.